Types of financial risk

Market risk relates to the probability of incurring a loss due to things like market volatility, hikes in interest rates or raw material costs, fluctuation in foreign currency values, etc. For example, exchange rate changes[2] will affect your debt repayments and the competitiveness of your goods and services compared with those produced abroad.

Credit risk is the probability of failing to pay to a creditor (such as a bank or a lender) or another party (eg a supplier). You may also incur credit risk by extending credit to customers[3], due to the possibility of them defaulting on payment.

Liquidity risk affects your ability to meet short-term financial demands to execute your business transactions. Key sources of risk are potential cashflow problems[4], because of things like the seasonal downturn in revenue, lack of buyers for your assets or inefficient market.

Operational risk is the likelihood of incurring a loss due to the negative effects of procedures, systems or policies you have in your business. Common sources include technical failures, fraud activity, employee errors, etc. Find out more about operational risk.

Financial risk management

Managing financial risks is a high priority for businesses, irrespective of their size or industry.